# Finance consists of providing and utilizing of money,

capital rights, credit & funds of any kind, which are

employed in the operation of an enterprise.
 
# Finance may be classified as:
(A)  Public Finance
(B) Private Finance

(i) Finance for Non profitable Organization

(ii) Finance for Profitable Organization

(a)  Sole Trader ship

(b)  Partnership
(c) Corporation
# Financial Manager’s Responsibilities :

1.  Forecasting and Planning

2.  Major Investment and Financing Decisions
3.  Coordination and Control
4.  Dealing with the Financial Markets
# Goals of the Corporation :
1.     Profit Maximization
-         Current Profit Maximization
-         Does Not Consider Longevity of project
-         Ignore Time Value of Money
-         Does not consider social Responsibility
 
2.     Wealth Maximization:
-         Consider Longevity
-         Consider Time Value Of Money
-         Maximize Wealth of The corporation
-         Maximize Share Price
-         Consider Social Responsibility
# Stakeholders : Group such as employees, customers,
suppliers, creditors, owners, and other’s who have a direct
economic link to the firm.

# Stakeholders expect to be compensated by:

- Wealth maximization
- Maximum long term benefit
- Positive stakeholders relationship may minimize
stakeholder turnover, conflicts, and litigation
- Social responsibility
# THE AGENCY ISSUE

The control of the corporation is frequently placed in the

hands of the professional non-owner managers. Thus
management can be viewed as agents of the owners who
have hired them and given them the decision-making
authority to manage the firm for the owners' benefit.
  Managers may consider personal benefits
  Managers may reluctant to take more than moderate
risk
# Agency Problem
The likelihood that managers may place personal goals ahead of
corporate goals.
 

# Resolving the Agency Problem

(1)  Market Forces
-   Electing Board Of Directors
-   Empowered to hire or fire
-   Expel under performing management
-   Threat of hostile takeover
 Hostile takeover is the acquisition of the firm (the target) by
another firm or group (acquirer).
 Threatened management to perform in the best interest of the
shareholders otherwise the owner may think about the possibility of a
hostile takeover
(2)Agency Costs:
Costs borne by stockholders to prevent or minimize
agency problem. Agency cost is of four types:

(i) Monitoring Expenses
These outlays pay for audits & control procedures that
are used to asses and limit the managerial behavior to
those actions tends to be in the best interest of the owners.
(ii)Bonding Expenses
-  Protect against the potential consequences of dishonest
acts by managers. Typically, the owners pay a third party
bonding company to obtain a fidelity Bond.

- This bond (fidelity) is a contract under which the

bonding company agrees to reimburse the firm for up to a
stated amount if a bonded managers dishonest act results
in financial loss to the firm.
(iii) Opportunity costs: Result from the difficulties that
large organizations typically have in responding to new
opportunities. The firms necessary organizational
structure, decision hierarchy, and control mechanisms
may cause profitable opportunities to be forgone because
of managements inability to seize up on them quickly.
(iv) Structuring Expenses are the most popular, powerful,
& expensive agency costs incurred by firms.
- Managerial compensation
- Incentive plans tend to tie management compensation to
share price. The most popular incentive plan is the
granting stock of options to management.
(a) Granting of Stock options to management. These
options allow managers to purchase stock at the market
price set at the time of the grant. If the market price rises,
they will be rewarded by being able to resell the shares
subsequently at the higher market price.
They are some times criticized because positive
management performance can be masked in a poor stock
market in which share prices general have declined due
to economic and behavioral market forces outside of
management’s control.
 
(b) Performance plans:
- The use of performance plan has grown in popularity in
recent years due to their relative independence from market
forces.
- These plans compensate managers on the basis of their
proven performance measured by earning per share and other
ratios of return.
- Another form of performance based compensation is
cash bonuses, cash payments tied to the achievement of
certain performance goals.